flowchart TB
FI[Financial Institutions] --> D[DFIs<br/>NABARD, SIDBI, EXIM, NaBFID]
FI --> N[NBFCs<br/>RBI — SBR Layers]
FI --> M[Mutual Funds<br/>SEBI — AMFI]
FI --> P[Pension Funds<br/>PFRDA — NPS / APY]
classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
65 Financial Institutions: Development Finance Institutions (DFIs); Non-Banking Financial Companies (NBFCs); Mutual Funds; Pension Funds
65.1 Concept of Financial Institutions
A financial institution is “an entity that mobilises savings and channels them into productive uses through credit, investment, insurance, or contractual savings”. In India they fall into four broad families: Development Finance Institutions (DFIs) for long-gestation projects, Non-Banking Financial Companies (NBFCs) for niche credit, Mutual Funds for collective investment, and Pension Funds for retirement saving. Each segment has its own regulator and statute — RBI for NBFCs, SEBI for MFs, PFRDA for pensions, and a mix of RBI/Government for DFIs.
65.2 Development Finance Institutions (DFIs)
DFIs are specialised long-term lenders that fund infrastructure, industry, agriculture, exports, housing, and small business — areas commercial banks find too risky or too long-tenor.
TipMajor Indian DFIs (Past & Present)
| DFI | Year | Mandate / Status |
|---|---|---|
| IFCI | 1948 | First DFI; industrial finance |
| ICICI | 1955 | Industrial credit; reverse-merged into ICICI Bank (2002) |
| IDBI | 1964 | Apex industrial financing; converted to bank (2004) |
| NABARD | 1982 | Apex for agri/rural credit (under RBI Act) |
| NHB | 1988 | Apex for housing finance |
| EXIM Bank | 1982 | Export-import finance |
| SIDBI | 1990 | MSME finance |
| IIFCL | 2006 | Infrastructure finance |
| MUDRA | 2015 | Micro-units refinance |
| NIIF | 2015 | National Investment & Infrastructure Fund |
| NaBFID | 2021 | National Bank for Financing Infrastructure & Development |
65.2.1 NaBFID — National Bank for Financing Infrastructure and Development
Set up under the NaBFID Act, 2021 with initial capital of ₹20,000 crore — India’s new statutory DFI focused on long-term infrastructure financing.
65.2.2 NABARD
The apex rural-credit body — established 12 July 1982 under the NABARD Act, 1981 based on the CRAFICARD Committee (Sivaraman, 1979). Functions: refinance to RRBs and cooperative banks, supervision of these institutions, Rural Infrastructure Development Fund (RIDF), promoting SHG-Bank linkage.
65.3 Non-Banking Financial Companies (NBFCs)
NBFCs are companies under the Companies Act that provide financial services — loans, leasing, hire-purchase, investment — but cannot accept demand deposits and have no cheque-book facility. Regulated by RBI under Chapter III-B of the RBI Act 1934.
TipNBFC Classification by Activity
| Type | Activity |
|---|---|
| Asset Finance Co (AFC) | Vehicle / equipment financing |
| Loan Co (LC) | General lending |
| Investment Co (IC) | Securities investment |
| Infra Finance Co (IFC) | ≥ 75 % infra loans |
| Infra Debt Fund (IDF-NBFC) | Refinance infrastructure debt |
| Core Investment Co (CIC) | Holding investments in group companies |
| NBFC-MFI | Micro-finance institution |
| NBFC-Factor | Receivables financing |
| HFC | Housing finance (regulator since 2019: RBI) |
| NBFC-P2P | Peer-to-peer lending |
| NBFC-AA | Account Aggregator |
65.3.1 Scale-Based Regulation (RBI 2022)
RBI introduced Scale-Based Regulation (SBR) for NBFCs from 1 October 2022:
TipNBFC Scale-Based Regulation Layers
- Base Layer (NBFC-BL) — non-deposit, asset size < ₹1,000 crore.
- Middle Layer (NBFC-ML) — deposit-taking + non-deposit ≥ ₹1,000 crore.
- Upper Layer (NBFC-UL) — top 10 NBFCs identified by RBI.
- Top Layer (NBFC-TL) — currently empty (would be flagged if systemic risk emerges).
65.3.2 NBFC vs Bank — Key Differences
TipNBFC vs Bank
| Feature | NBFC | Bank |
|---|---|---|
| Demand deposits | ✗ | ✓ |
| Cheque book | ✗ | ✓ |
| CRR / SLR | ✗ (mostly) | ✓ |
| Deposit insurance (DICGC) | ✗ | ✓ |
| Payment & settlement | ✗ | ✓ |
| Required CRAR | 15 % | 9 % |
65.4 Mutual Funds
A Mutual Fund is “a trust that pools money from investors and invests in equity, debt, money-market, or hybrid securities according to a stated objective”. Regulated by SEBI under SEBI (Mutual Funds) Regulations 1996.
65.4.1 Structure of an Indian Mutual Fund
TipMutual Fund Structure
- Sponsor — promoter (≥ 40 % net worth of AMC; 5-year track record).
- Trust — Indian Trusts Act 1882; holds assets in trust for unit-holders.
- Trustees — oversight; ≥ 2/3 independent.
- Asset Management Company (AMC) — manages portfolios; SEBI-registered.
- Custodian — holds securities; SEBI-registered.
- Registrar & Transfer Agent (RTA) — investor servicing.
65.4.2 MF Schemes — Classification
TipMF Schemes Classification
- By structure: Open-ended, Closed-ended, Interval.
- By asset class: Equity, Debt, Hybrid, Solution-oriented, Other (Index/ETF/FoF).
- By investment objective: Growth, Income, Liquid, Tax-saving (ELSS — 3-yr lock-in, §80C).
- Special: SIP, STP, SWP; Direct vs Regular plans.
65.4.3 Indian MF Industry Milestones
TipMF Industry Milestones
- 1963: UTI established as first MF.
- 1987: Public sector banks/insurers allowed (SBI MF first).
- 1993: Private sector entry (Kothari Pioneer first).
- 1996: SEBI (MF) Regulations.
- 2009: Entry load abolished.
- 2013: Direct plans introduced.
- 2018: Scheme categorisation rationalised.
65.4.4 AUM and AMFI
- AMFI — Association of Mutual Funds in India (industry body).
- Indian MF AUM: ~ ₹55-60 lakh crore (mid-2020s).
- Largest fund houses: SBI MF, HDFC MF, ICICI Prudential MF, Nippon India MF, Kotak MF.
65.5 Pension Funds
Pension reform in India began with the OASIS Report (Project OASIS, 2000) and the NPS rollout (2004 for new central government employees; 2009 for all citizens).
65.5.1 National Pension System (NPS) — Architecture
TipNPS Architecture
- Regulator: PFRDA under PFRDA Act 2013.
- Two tiers: Tier-I (pension; mandatory for govt employees), Tier-II (voluntary, withdraw any time).
- Subscribers: All Indian citizens 18-70 years.
- Fund managers (NPS Trust): SBI PF, LIC PF, UTI Retirement Solutions, HDFC PF, ICICI Prudential PF, Aditya Birla Sun Life PF, Kotak PF, Max Life PF, Tata PF, DSP PF, Axis PF.
- Investment choices: Auto (LC-25/50/75) or Active (E/C/G/A — Equity / Corporate Bonds / G-sec / Alternative).
- Equity cap: 75 % up to age 50, then taper.
- Charges: lowest among long-term retirement products.
- Tax: §80CCD(1) up to 10 %, §80CCD(1B) additional ₹50,000, §80CCD(2) employer contribution up to 14 % (govt) / 10 % (others). 60 % corpus tax-free at exit, 40 % annuity mandatory.
65.5.2 Other Pension Schemes
TipOther Major Pension Schemes
- EPF / EPS — Employees Provident Fund / Pension Scheme (under EPFO).
- Atal Pension Yojana (APY) — 2015: ₹1,000-5,000 monthly pension; 18-40 years entry.
- PM Vaya Vandana Yojana — senior citizens via LIC.
- Pradhan Mantri Shram Yogi Maandhan (PM-SYM) 2019 — for unorganised workers.
NoteDistractor warning
PYQ trap: NBFC cannot accept demand deposits (no cheque book); NBFC CRAR 15 % (bank 9 %); NPS regulator = PFRDA, NPS Act 2013.
65.6 Practice Questions
Q 01NABARDEasy
NABARD was established in:
View solution
Correct Option: B
**NABARD 12 July 1982** under NABARD Act 1981 (CRAFICARD Committee).
Q 02SIDBIMedium
SIDBI was set up as the apex financial institution for:
View solution
Correct Option: B
**SIDBI 1990** — MSME apex.
Q 03NaBFIDHard
NaBFID is a statutory body set up in:
View solution
Correct Option: B
**NaBFID Act 2021** — infrastructure DFI.
Q 04NBFCMedium
Which of the following can an NBFC NOT do?
View solution
Correct Option: B
NBFCs **cannot accept demand deposits and have no cheque book**.
Q 05CRARMedium
Minimum CRAR for NBFCs:
View solution
Correct Option: C
NBFC CRAR **15 %**; banks 9 % (India).
Q 06SBRHard
RBI's Scale-Based Regulation for NBFCs became effective:
View solution
Correct Option: B
**SBR effective 1 Oct 2022** — Base, Middle, Upper, Top layers.
Q 07HFCHard
Housing Finance Companies (HFCs) — primary regulator since 2019:
View solution
Correct Option: B
From 2019, HFC regulation shifted from NHB to **RBI**; NHB is supervisor.
Q 08MF regMedium
Mutual funds in India are regulated by:
View solution
Correct Option: B
**SEBI** under SEBI (MF) Regs 1996.
Q 09UTIEasy
India's first mutual fund — UTI — was set up in:
View solution
Correct Option: B
**UTI established 1963** — Unit Trust of India Act.
Q 10ELSSMedium
ELSS mutual funds enjoy tax benefit under §80C with lock-in of:
View solution
Correct Option: B
**ELSS 3-year lock-in**, §80C up to ₹1.5 lakh.
Q 11MF structureMedium
In an Indian mutual fund, who holds the assets?
View solution
Correct Option: B
**Custodian** holds securities; AMC manages.
Q 12PFRDAMedium
PFRDA was given statutory status under:
View solution
Correct Option: A
**PFRDA Act 2013**.
Q 13NPSMedium
NPS was opened for all Indian citizens in:
View solution
Correct Option: B
**Govt employees: 2004**; **All citizens: 2009**.
Q 14NPS assetHard
In NPS Active Choice, maximum equity allocation up to age 50 is:
View solution
Correct Option: C
**75 % equity** up to age 50, then tapers.
Q 15APYMedium
Atal Pension Yojana (APY) was launched in:
View solution
Correct Option: B
**APY 2015** — guaranteed pension ₹1,000-5,000 monthly for unorganised sector.
Q 1680CCD(1B)Hard
Additional NPS tax deduction under §80CCD(1B):
View solution
Correct Option: C
**₹50,000** over and above §80C.
Q 17MF entry loadHard
SEBI abolished MF entry load in:
View solution
Correct Option: B
Entry load abolished **2009**; direct plans introduced 2013.
Q 18DFI matchMedium
Match each DFI with its mandate:
| DFI | Mandate | ||
| (i) | NABARD | (a) | Housing |
| (ii) | NHB | (b) | Agriculture/Rural |
| (iii) | EXIM | (c) | MSME |
| (iv) | SIDBI | (d) | Export-Import |
View solution
Correct Option: A
NABARD-Rural, NHB-Housing, EXIM-Trade, SIDBI-MSME.
Q 19CICHard
A Core Investment Company (CIC) primarily:
View solution
Correct Option: B
**CIC** holds equity/preference/debt of group companies; ≥ 90 % NA in such investments.
Q 20Reg matchMedium
Match each institution with regulator:
| Institution | Regulator | ||
| (i) | NBFC | (a) | SEBI |
| (ii) | Mutual Fund | (b) | RBI |
| (iii) | Pension Fund | (c) | PFRDA |
| (iv) | Insurance | (d) | IRDAI |
View solution
Correct Option: A
NBFC-RBI; MF-SEBI; PF-PFRDA; Insurance-IRDAI.
65.7 Quick Recall
ImportantQuick recall
- DFIs — IFCI 1948, ICICI 1955 (→ bank 2002), IDBI 1964 (→ bank 2004), NABARD 1982, NHB 1988, EXIM 1982, SIDBI 1990, IIFCL 2006, MUDRA & NIIF 2015, NaBFID 2021.
- NBFCs — Chapter III-B RBI Act 1934; cannot accept demand deposits; CRAR 15 %; SBR 1 Oct 2022 (Base/Middle/Upper/Top).
- MFs — SEBI (MF) Regs 1996; UTI 1963; private entry 1993; direct plans 2013. ELSS — 3 yr lock-in, §80C.
- Pensions — OASIS Report 2000; NPS govt 2004, all citizens 2009; PFRDA Act 2013; APY 2015; equity cap 75 %; §80CCD(1B) ₹50,000 extra; 60 % corpus tax-free at exit.
- NPS architecture — PFRDA → NPS Trust → 11 pension fund managers; Tier I (pension), Tier II (voluntary).